The emergency welfare payments that fraudsters treat as a 'hole in the wall' and cost the taxpayer £1million a day

Welfare loans meant to help families facing financial crisis are open to widespread abuse as false claimants spend them on luxuries.

Hundreds of thousands of claimants are abusing the Crisis Loan Payment system, the Department for Work and Pensions said today as it announced the way the payments are run will be completely overhauled.

Crisis Loans are interest-free payments of up to £1,500 to help people in emergencies but many are reportedly being used to fund holidays and recreation.

The payments cost the taxpayer £1million a day.

Wasted welfare: The Department of Work and Pensions has seen an emergency loan scheme is being abused

Set up in 1988 to help families who had been the victims of emergencies such as fire and theft, the loans are granted if applicants can convince DWP officials that their need is genuine and they will be able to make repayments in the future.

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But while many applicants are on benefits and can have their repayments taken from their welfare handouts, the department believes the system has fallen victim to abuse.

Crackdown: Minister for Pensions Steve Webb plans to overhaul the Crisis Loan system

An internal report reportedly suggests the scheme is being treated like a ‘hole-in-the-wall machine’,.

Some 200,000 people received three or more Crisis Loans in the last 12 months, at a cost of around £81.5million but a further 17,000 have been granted 10 or more handouts.

A DWP spokesman said: 'DWP is reforming Crisis Loans as part of its overhaul of loans and grants available through the Social Fund. The system has become too complex to administer, poorly targeted and open to abuse. More robust checks and balances will be introduced, linking with other local support to make sure that the money goes only to those who need it.'

It is feared that abuse of the system could leave welfare coffers empty and drive genuine claimants towards borrowing from loan sharks.

Minister for Pensions Steve Webb said: 'These figures show the system is a sticking plaster solution that isn’t addressing the real problems people are facing.

This is why we’re replacing it with local schemes so loans go to those who need them most.'